Union Pacific (NYSE: UNP) executives on the company’s third quarter earnings call moved to dispel any doubt that they are “all in” on switching the company’s operations to precision railroading principles, attempting to push back against what one executive on the call said were rumblings in the industry that they are doing “precision railroading light.”
UP CEO Lance Fritz said the railroad already is implementing precision railroading principles in its Mid-American corridor, under a plan dubbed Unified Plan 2020, which is mostly the eastern half of the railroad’s system. “While it is early, I am pleased with the initial results and we’ve seen improvement in several indicators,” Fritz said.
UP executive vice president Tom Lischer said UP is implementing precision railroading principles “in a manner that fits our network.” The company’s focus will be shifting from an emphasis on moving trains to moving cars. The goals include reduced car and locomotive dwell times, “and it’s also designed to better balance our resources across our network,” which he said would be “simplified.”
Lischer spoke of one customer where there have been changes in building “blocks” of rail cars, and the result has been to significantly reduce freight car dwell time. The service time has been moved up three days as a result, Lischer said.
Similarly, Lischer spoke of another customer where pre-boxing of their product at their facility allows UP to bypass a switching yard and the changes have eliminated 24-36 hours of dwell time, “and gives them an overall faster schedule.”
All of this sounds so easy, but it takes a significant change in approach. Fritz said the “single biggest prompt” for the company to switch to precision railroading principles is that the former approach “resulted in many different boutique services that can be complex and interfered with consistent service.” The goal instead, Fritz said, will be to generate that consistent service by focusing on car movement moving in a manifest network, “rather than a boutique train network.”
As a result, it was mentioned several times on the call by executives that there would need to be some “difficult” or “frank” discussions with customers, who presumably were the beneficiaries of that “boutique” approach to the railroad.
Seeking new business now will be put through a “filter” that Fritz said seeks to answer the question: “Will the business fit into the network?”
Lischer ticked off the steps that have been taken in that corridor: schedules have been adjusted, assets have been better utilized, the number of locomotives on the system have been reduced. “We’ve made dozens of these types of changes,” he said “We’re just getting started.”
Rolling Unified Plan 2020 into the company’s Sunset system will begin earlier than expected, Lischer said.
The call featured a slide showing how some benchmarks have improved as a result of the first steps the company has taken. Some are traditional benchmarks, like car dwell. But Fritz said others are ones that Union Pacific traditionally has not tracked, like car miles per day.
As Lischer ticked off some of the changes in the UP system since it started implementing changes, one could think he was talking about a railroad that was shrinking and in trouble: 625 locomotives out of the active fleet and with a “line of sight” for another 150; car operating inventory down 6,000 cars with plans to cut that by another 10,000; a workforce that is down 2% from August to September. It was reported a few days ago that several hundred jobs were being eliminated in the management ranks, and that was confirmed on the call.
The irony is also that these cuts, integral to a precision railroading model, came as the company reported a strong quarter and are what precision railroading is all about: squeezing down costs to improve the company’s operating ratio by making major changes in how demand for a railroad’s services is met.
For Union Pacific, that holy grail number in railroading today–the OR–was 61.7%, unchanged from the third quarter of 2017.
Beyond that, earnings per share of $2.15 was a quarterly record, up from $1.50 per share. Volume growth compared to 2017’s third quarter was up 6%, and quarterly freight revenue was up 10% from a year earlier. But train speed–one of the targets of the Unified Plan 2020–was down 6% from a year earlier, down to 24 mph.
The company’s core pricing was down from the second quarter to a 1.75% gain from 2%. Pricing at Union Pacific is a function of volume plus price, so a low volume product that rises significantly could have as much impact on the overall number as a high volume product with a smaller gain. One analyst noted that a decline in frac sand volume could have been a key reason for the decline.
Robert Knight, the company’s CFO, declined to give precise guidance on projected price increases. But he said UP fully expects pricing to stay ahead of inflation.
At approximately 2:10 p.m., Union Pacific stock was up 3.05% to $144.73, a gain of $4.50.